Spreads in Trading: What Are They?

As a participant in the retail trading market, you will need to learn many terms. A term you will encounter most often is the spread, which is broadly defined as the difference between your broker's sell rate and buy rate when exchanging or trading a financial asset. Understanding what this term means and, more importantly, how to apply it, will set you up to read quotes more clearly and to make trading decisions faster. 

Retail traders must pay close attention to spreads, as this seemingly small charge can significantly impact their profitability, especially in high-frequency or short-term trading. A wider spread means higher transaction costs, which can eat into potential gains or amplify losses. For traders using scalping or day-trading strategies, even a few extra pips in spread costs can accumulate into a substantial expense over time. In this article, we will refer mainly to spreads in FOREX trading, and when we refer to spreads in other asset types, we will make that clear.

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What Is a Spread in Trading?

FOREX trading is all about exchanging one currency for another. To create a universal language in which everyone understands the value of a currency in relation to another, currency A is quoted in terms of its price in currency B. This is known as the exchange rate. The spread is the difference between the exchange rate that a broker sells a currency and at which the broker buys that currency. 

Spreads can be fixed or variable, with fixed spreads remaining constant and variable spreads fluctuating based on market conditions. The size of the spread is influenced by liquidity and volatility, meaning major currency pairs like EUR/USD tend to have tighter spreads than exotic pairs. Brokers may charge spreads as their primary form of compensation, especially in commission-free trading accounts. Understanding how spreads change during different trading sessions, such as the London or New York session overlaps, can help you optimize your entry and exit points for better cost efficiency.

Why are spreads required?

Spreads are how market makers and liquidity providers earn their keep. In FOREX, there’s no central exchange like the New York Stock Exchange. Instead, banks, brokers, and electronic networks provide the quotes you see on your screen. They stand ready to buy from one trader and sell to another, effectively creating a market. For taking on that role, they need to be compensated. The spread is that built-in compensation.

At its core, the spread reflects supply and demand. When a pair like EUR/USD is highly liquid, with banks and funds trading billions daily, spreads can shrink to fractions of a pip because there’s always a counterparty. In less liquid markets, say, exotic pairs like USD/TRY, fewer participants mean wider spreads. The provider needs more buffer to cover their risk of holding inventory no one else is rushing to buy or sell.

What is a good spread in trading?

A “good” spread depends on the market and the pair you’re trading. On highly liquid majors like EUR/USD or USD/JPY, spreads can often drop below 1 pip during active sessions. That’s generally considered tight and favorable, because your cost to enter and exit is minimal. Crosses such as EUR/GBP or AUD/NZD might hover around 2-4 pips, while exotics like USD/ZAR or USD/TRY can stretch into double digits. The key rule: the more liquid the market, the tighter the spread.

Is spread trading risky?

Spreads themselves aren’t risky, they’re just the built-in cost of trading. The risk comes when spreads widen unexpectedly, often during news announcements, low-liquidity hours, or on thinly traded pairs. A position that looks profitable can flip negative if the spread balloons by 10 or 20 pips in seconds. This is why scalpers are highly sensitive to spreads: if you’re targeting 5 pips per trade, and the spread jumps to 3 pips, half your profit potential is gone before you start. Swing traders chasing 200-pip moves care less, but they still pay attention during volatile periods.

What spread is good for trading for beginners?

For new traders, stick with the majors. A spread of 1–2 pips on EUR/USD, GBP/USD, or USD/JPY is ideal. These pairs are liquid, stable, and widely covered by brokers and analysts. Avoid exotics in the beginning, as spreads can be 10 pips or higher, which makes risk management harder. Tight spreads give beginners a fairer shot at break-even levels, letting them focus on building strategy and discipline rather than battling trading costs.

What Are The Different Types of Spreads?

There are many different types of spreads. We’ll explain the main ones.

Fixed spread

A fixed spread means the difference between the bid and ask price stays the same, no matter what the market is doing. If your broker quotes EUR/USD with a 2-pip spread, that spread won’t widen during news announcements or thin liquidity hours; it’s locked in.

The biggest advantage here is predictability. Traders always know the cost of entering and exiting a position. For beginners, this can be reassuring because you are never surprised by sudden spikes in trading costs. It also makes planning scalping or intraday strategies easier, since you can build fixed transaction costs into your calculations.

The downside is that fixed spreads are often set higher than variable spreads during normal trading conditions. Where an Electronic Communications Network (ECN) broker might show 0.4 pips on EUR/USD at peak liquidity, a fixed-spread account may hold steady at 2 pips. Over time, that extra cost adds up.

Fixed spreads are common with market-maker brokers, who take the other side of trades. These brokers absorb the volatility risk themselves, so, in return, they charge a higher, constant spread. For some traders, especially those trading smaller sizes or testing strategies, paying slightly more certainty is worth it. For others, especially high-volume traders, the hidden cost of fixed spreads can weigh heavily on performance.

Variable/ floating spread

A variable spread, also called a floating spread, moves with the market. Instead of paying a fixed cost, you see spreads that tighten or widen depending on liquidity and volatility. On a calm day in EUR/USD, a floating spread might be as low as 0.2-0.5 pips. But during a major news release, that same spread can jump to 5 pips or more in seconds.

The main advantage is cost efficiency. In liquid markets, variable spreads are often far tighter than fixed spreads, which makes them attractive to active traders who benefit from low transaction costs. ECN and Straight Through Processing (STP) brokers usually offer floating spreads, passing on raw pricing directly from liquidity providers with only a small markup or commission.

The drawback is uncertainty. When volatility spikes, such as during non-farm payrolls or central bank decisions, spreads can widen dramatically. For scalpers or traders with tight stops, this can trigger unexpected losses or stop-outs. Even swing traders need to be mindful of how spreads behave outside peak sessions.

In short, here are some key elements of variable spreads:

• They give traders lower costs in calm conditions 

• They demand a tolerance for occasional surprises when the market heats up 

• They are the preferred choice for most experienced traders who value raw pricing and can manage volatility 

• They are scary to beginners who often find the unpredictability unsettling.

Raw spread

Some brokers advertise raw spreads, which are essentially the near-zero spreads you’d see on an ECN account, combined with a separate commission charge. Instead of widening the spread to earn their margin, the broker passes on the interbank price feed almost directly, so you might see EUR/USD quoted at 0.0-0.2 pips during liquid sessions.

The cost comes through the commission per trade, usually a fixed-dollar amount per lot (for example, $7 per round turn on a standard lot). For high-volume traders, this model can actually work out cheaper than paying wider floating or fixed spreads because the raw spread plus commission often totals less than a 2-pip all-in cost.

Raw spread accounts are almost always offered under the ECN execution model, where your trades are matched with liquidity providers rather than filled internally by a market maker. That means more transparent pricing and the ability to get filled at precise, pipette-level quotes. We’ll explain the ECN and STP models in another section.

The trade-off is that raw spread accounts tend to suit: 

• Experienced traders 

• High-frequency traders, or 

• Algorithmic traders 

Each of these trader types value every fraction of a pip. Beginners might find the commission model harder to calculate, and the benefit of razor-thin spreads is less noticeable if you’re trading micro lots.

How Are Spreads Measured?

Spreads are a dynamic and multi-faceted tool as they can be measured in a few different ways.

Spreads in pips

Spreads in FOREX are always measured in pips, since pips are the universal unit of price movement. If EUR/USD shows a bid price of 1.1000 and an ask price of 1.1002, the spread is 2 pips. On a minor like EUR/GBP, you might see 0.8500 bid and 0.8504 ask, which equals a 4-pip spread. The tighter the spread, the cheaper it is to enter and exit the trade.

But spreads don’t just stop at being pip differences, you need to translate them into actual dollar costs. That’s where lot size and pip value come in. The formula is straightforward:

Spread cost in lots

Spread Cost = Spread (in pips) × Pip Value × Lot Size

Let’s run the numbers on EUR/USD at 1.1000:

• Spread: 2 pips

• Pip Value (per standard lot): about $10 per pip

• Lot Size: 1 standard lot (100,000 units)

So: 2 × $10 × 1 = $20 cost to open that trade.

If you drop to a mini lot (10,000 units), the same spread only costs $2. On a micro lot (1,000 units), it’s just 20 cents. The spread is the same, but the monetary impact changes with your position size.

This is why majors with sub-1 pip spreads are so attractive to scalpers; costs stay low when trades are frequent. Minors and exotics with wider spreads eat more into profit potential, which makes them better suited to longer-term strategies.

What Factors Affect Spreads?

When it comes time to trade FOREX, spreads vary according to market demand, economic conditions, and other factors, like the time of day (opening hours vs. peak trading) or even the time of year (close to holidays).

Market volatility

Spreads don’t stay still. One of the first things traders notice during news announcements or sudden market shocks is that spreads can widen dramatically. A pair like EUR/USD, which might trade at a tight 0.5–1 pip spread in calm conditions, can easily balloon to 5, 10, or even 20 pips during such high-impact events as non-farm payrolls, Federal Reserve rate decisions, or unexpected geopolitical headlines.

The reason is liquidity. Market makers and liquidity providers pull back during volatile moments because the risk of holding unwanted positions spikes. With fewer participants willing to quote aggressively, the bid-ask gap expands to protect providers from sudden adverse moves. For traders, that wider spread becomes an instant increase in trading cost.

This matters most for short-term strategies. A scalper aiming for 5 pips has no chance of success if the spread suddenly jumps to 8. Even swing traders can feel the pinch when a stop-loss gets triggered not by price action but by an artificially wide spread.

Liquidity

Spreads are ultimately a reflection of liquidity: how many buyers and sellers are active in the market at any given time. The deeper the liquidity, the tighter the spread. This is why major pairs like EUR/USD, USD/JPY, and GBP/USD consistently offer the lowest trading costs. With trillions of dollars changing hands daily, providers can quote spreads as tight as 0.2–1 pip during peak sessions because they know there will always be counterparties to match orders.

On the other end of the spectrum are exotic pairs like USD/TRY or USD/ZAR. These markets see far fewer participants, which means wider spreads are necessary to compensate liquidity providers for the added risk. A spread of 10–20 pips is not unusual on an exotic, even in normal conditions, and can widen much further during volatility. That makes short-term trading in exotics far more expensive than in majors, where costs are razor-thin.

The difference in liquidity doesn’t just affect spreads, it also impacts execution. Majors usually offer smoother fills at expected prices, while exotics carry a higher chance of slippage. For retail traders, this means majors are the best choice for scalping and day trading, while exotics are better suited to those with long-term horizons who can afford to sit through higher trading costs.

Broker model

The type of broker you trade with has a direct impact on the spreads you see. Different execution models, market makers, ECN, and STP, handle pricing in different ways, which shapes both cost and transparency.

Market makers create their own internal market. They quote both the bid and ask price to clients and stand as the counterparty to your trades. Because they absorb the risk of filling orders, they usually offer fixed spreads, predictable, but often wider than what’s available in the interbank market. For new traders, this stability can be appealing, but the trade-off is higher long-term costs.

ECN brokers connect traders directly to liquidity providers like banks and funds. They don’t widen spreads themselves but instead pass on raw market prices, which can fall as low as 0.0-0.2 pips on majors in liquid hours. The broker charges a separate commission per lot traded. ECN models are highly transparent, but spreads can swing widely during volatility, and the commission structure suits more experienced or high-volume traders.

STP brokers are something of a middle ground. They route orders straight to liquidity providers without creating an internal market, but unlike ECNs, they typically add a small markup to the spread instead of charging a separate commission. That means spreads are variable and slightly wider than raw ECN pricing, but costs remain relatively straightforward.

In short:

• Market makers = stability, higher spreads.

• ECN = tightest spreads, commission-based, higher volatility sensitivity.

• STP = hybrid model with moderate, variable spreads.

Time of day

Spreads aren’t just shaped by broker models or currency choice, they also expand and contract depending on the time of day. Liquidity follows the global trading sessions, and the tightest pricing happens when activity is at its peak.

During the Asian session, when only Tokyo and a handful of regional markets are active, liquidity is thinner. Majors like EUR/USD and GBP/USD often see spreads widen slightly compared to their London or New York hours. Yen pairs, on the other hand, tend to be cheapest to trade in this window since Japan is their home market.

The London-New York overlap is the opposite story. This four-hour block is when the world’s two largest financial centers trade simultaneously, creating the deepest liquidity of the day. Spreads on EUR/USD and USD/JPY can compress to fractions of a pip as banks, funds, and retail traders all participate heavily. For scalpers and day traders, this period offers the most cost-efficient conditions.

Outside of peak hours, such as the late U.S. evening, when both New York and London are offline, spreads widen again. With fewer market participants, brokers and liquidity providers need extra margin to cover risk. That’s why many traders avoid placing new positions right at the daily rollover, when spreads can briefly spike.

How Do Spreads Work Across Different Markets?

You can expect to find spreads applied differently across markets. Here’s how they work:

FOREX

In FOREX, spreads are directly tied to liquidity. The tightest spreads are found in the world’s most heavily traded pairs: EUR/USD and USD/JPY. With trillions of dollars in daily turnover, there’s always a buyer for every seller, which allows brokers and liquidity providers to quote spreads as low as 0.0-0.5 pips during peak trading hours. For traders, that means lower entry costs and faster fills, which is why these majors are the backbone of most short-term strategies.

But not all pairs enjoy the same depth. Exotics like USD/TRY, USD/ZAR, or USD/SEK trade on far smaller volumes and carry more risk for liquidity providers. As a result, spreads can easily stretch into the 10-20 pip range, even in normal conditions. Factor in volatility or news events, and those spreads can widen dramatically. For traders, that means higher costs upfront and a greater challenge in reaching break-even levels.

This liquidity dynamic explains why scalpers and day traders overwhelmingly stick to majors, where costs are razor-thin, while longer-term players might occasionally venture into exotics if the trend is compelling enough to outweigh the wider spreads.

Stocks

In equities, the spread takes the form of the bid-ask spread — the gap between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. Unlike FOREX, where pips are the universal measure, stock spreads are quoted in points or cents, depending on the share price.

For highly liquid stocks like Apple or Microsoft, spreads can be as tight as a single cent because millions of shares trade hands daily. This means traders can enter and exit with minimal cost. On less liquid stocks, such as a small-cap company with thin trading volume, the spread might stretch to several cents or even dollars. In those cases, the cost of crossing the spread becomes significant, especially for active traders.

The size of the spread is shaped by supply and demand on the order book. When there are plenty of bids and offers close together, spreads narrow. When participation dries up, spreads widen, forcing traders to pay more to get filled. This is why institutional traders focus on liquid, high-volume names: tighter spreads reduce slippage and keep costs predictable.

Commodities and indices

Commodities and indices don’t use pips, but the principle of the spread, the cost of crossing the bid–ask gap, remains the same. Instead of pips, spreads are quoted in points or ticks, with the dollar value tied to the contract size.

Gold (XAU/USD). Many brokers quote gold to two decimal places, with spreads often starting around 0.1-0.5 points ($0.10–$0.50 per ounce). Since a standard contract is 100 ounces, even a $0.50 spread equals $50 in cost. Liquidity is high in gold, but spreads can widen around U.S. economic data or Federal Reserve announcements, when volatility spikes.

Crude oil (WTI or Brent) typically trades in increments of $0.01 per barrel. With contracts representing 1,000 barrels, a 3-cent spread equals $30 per contract. During calm market hours, spreads may sit at just a few cents, but geopolitical shocks or OPEC headlines can see them widen significantly, reflecting the sudden surge in uncertainty.

Indices like the S&P 500 or NASDAQ are quoted in index points. For example, E-mini S&P 500 futures have a minimum tick size of 0.25 index points, worth $12.50 per contract. Brokers offering CFDs on indices often simplify this: a 1-point spread on the NASDAQ 100 CFD might cost $1 per mini contract. Just like in FOREX, liquidity dictates the size of the spread — major indices enjoy tight spreads, while smaller or regional indices can carry higher costs.

The common thread across commodities and indices is that spreads are tied not just to liquidity but also to volatility. In quiet sessions, spreads stay tight; when big news hits, they can widen fast, turning execution costs into a critical part of the trade.

Cryptocurrencies

Cryptocurrencies are notorious for having higher spreads than traditional markets. The reason is twofold: volatility and liquidity. Unlike EUR/USD or the S&P 500, where deep institutional participation keeps spreads razor-thin, crypto markets are still relatively fragmented. Liquidity is spread across dozens of exchanges, and price swings can be violent.

For majors like Bitcoin (BTC/USD) or Ethereum (ETH/USD), spreads at top-tier brokers and exchanges might sit in the range of $5-$15 under normal conditions. But during sharp rallies or sell-offs, spreads can balloon into the tens or even hundreds of dollars as market makers step back to protect themselves from risk. On smaller altcoins, where liquidity is thin, spreads can be even wider relative to price, sometimes several percent of the asset’s value.

This makes spread costs a critical factor for crypto traders, especially those running short-term strategies. A $20 spread on Bitcoin may not matter much if you’re aiming for a $2,000 move, but it can wipe out the edge on scalps targeting smaller intraday swings. Long-term investors are less affected, though they still face the reality that entering or exiting large positions may move the market against them.

In short, crypto spreads reflect the youth of the market: 

• less liquidity, 

• more volatility, and 

• higher execution costs. 

As institutional adoption grows, spreads on major coins are narrowing, but compared to FOREX or gold, crypto remains one of the most expensive markets to trade in pip-equivalent terms.

Bond markets

Yield spreads

In fixed income, spreads take on a different meaning. Instead of bid-ask gaps, traders and analysts watch yield spreads, the difference in interest rates between two bonds. These spreads are expressed in basis points (bps), where one bp equals 0.01%.

A classic example is the U.S. Treasury yield curve, particularly the spread between the 10-year and 2-year notes. If the 10-year yields 4.20% and the 2-year yields 4.50%, the spread is –30 bps. That inversion, short-term yields higher than long-term, has long been read as a signal of economic slowdown or even recession risk. By contrast, when the curve is steep and the 10-year yield sits well above the 2-year, markets often interpret it as a sign of healthy growth expectations.

Credit markets also use spreads to measure risk. The difference between a corporate bond’s yield and a comparable U.S. Treasury yield, known as a credit spread, tells investors how much extra compensation they demand for taking on credit risk.

Credit spreads

While government yield curves highlight growth expectations, credit spreads measure risk. A credit spread is the difference in yield between a corporate bond and a comparable risk-free bond of the same maturity, usually a U.S. Treasury. If a 10-year corporate bond yields 6.00% and the 10-year Treasury yields 4.50%, the credit spread is 150 basis points (bps).

Liquidity spreads

Another important concept in bond markets is the liquidity spread, the extra yield investors demand for holding securities that are harder to trade. Even if two bonds have the same credit rating and maturity, the one that trades less frequently or has a thinner market will usually offer a higher yield. That extra yield is the liquidity premium.

Swap spreads

A final type of bond market spread is the swap spread, the difference between the yield on a government bond and the fixed rate of an equivalent-maturity interest rate swap. In simple terms, it measures the gap between what the government pays to borrow and what banks pay to exchange fixed and floating interest-rate cash flows.

Z-spread

Another advanced fixed-income concept is the Z-spread, short for “zero-volatility spread.” It represents the constant spread that must be added to the entire Treasury yield curve so that the present value of a bond’s cash flows equals its market price. Unlike a simple credit spread that compares a bond’s yield to a single Treasury of matching maturity, the Z-spread accounts for the full term structure of interest rates.

Option-adjusted spread (OAS)

While the Z-spread measures the constant premium over the Treasury curve, it doesn’t fully capture the impact of embedded options. That’s where the Option-adjusted spread (OAS) enters the picture. The OAS takes the Z-spread and adjusts it for the value of options, such as calls, puts, or prepayment rights, that can change a bond’s cash flow profile.

By stripping out the effect of optionality, the OAS isolates the “true” spread investors earn for credit and liquidity risk alone. 

Options

In options trading, a spread means combining two or more positions to shape risk and reward. Instead of buying or selling a single option outright, traders use spreads to cap losses, reduce costs, or exploit specific market views. Here are some of the most common strategies:

Bull call spread
This strategy involves buying a call option at a lower strike while simultaneously selling a call at a higher strike with the same expiry. The purchased call gives upside exposure, while the sold call offsets the premium cost. Profits are capped, but so is risk, making it ideal when traders expect a moderate rally rather than a runaway trend.

Bear put spread
The mirror image of the bull call. A trader buys a put at a higher strike and sells a put at a lower strike. The long put provides downside protection, while the short put reduces the entry cost. The payoff is limited, but so is the risk, suited for traders expecting a controlled drop in price.

Long butterfly spread
A more advanced setup that profits from range-bound markets. It combines two short options at a middle strike with one long option above and one below. The net cost is low, and the payoff peaks if the underlying finishes near the middle strike. It’s a precision bet on low volatility.

Calendar (Time) spread
Here, you sell a near-term option and buy a longer-term option at the same strike. The goal is to profit from differences in time decay and potential shifts in volatility. If the underlying stays near the strike, the short-term option decays quickly, leaving value in the longer-dated option.

Box spread
A combination of a bull call spread and a bear put spread with the same strikes and expiry. The payoff is fixed, effectively turning the trade into an arbitrage instrument. Box spreads are used mainly by professionals to exploit mispricings in the options market and lock in a near risk-free return.

In essence, options spreads are about trade engineering — using combinations to fine-tune exposure. They limit risk, cut costs, and allow traders to profit not just from direction, but also from volatility and time.

Futures

In futures markets, a spread means holding two related positions simultaneously, typically in the same underlying contract but with different expiry dates. Instead of betting purely on the outright direction of price, traders use futures spreads to profit from changes in the price difference between the two contracts, what’s known as the term structure of the market.

For example, in crude oil futures, a trader might go long the June contract and short the December contract. If near-term demand tightens supply, the June contract could rise faster than December, and the spread widens in the trader’s favor. Conversely, if longer-dated contracts outperform, the spread narrows, and the trader loses.

Futures spreads are widely used because they can reduce outright risk. By holding both long and short legs, the trader is partially hedged against broad market swings, focusing instead on relative value between maturities. Exchanges even list many spreads as a single tradable unit, allowing tighter margin requirements compared to holding two legs separately.

This style of trading is central to commodities like oil, natural gas, and grains, where seasonal effects, storage costs, and inventory levels all shift the balance between near-term and future-dated prices. In financial futures, like Treasury bonds, calendar spreads provide a way to trade expectations around interest rate policy shifts.

What Risks are Involved with Spreads?

While spreads are powerful tools for shaping risk and reward, they’re not without hazards. Traders need to recognize the specific risks that come with managing multi-leg positions.

Market and early-assignment risk
Even with capped risk structures like option spreads, adverse market moves can still result in maximum loss. In options, there’s also the danger of early assignment, where a short option is exercised before expiry. This can distort the payoff profile and complicate trade management, particularly if one leg disappears unexpectedly.

Liquidity risk
Spreads rely on entering and exiting multiple legs efficiently. In thinly traded contracts, wide bid–ask spreads can make execution costly. What looks like a tidy setup on paper may erode quickly if you pay extra to open and close each side of the spread. For futures and options spreads, liquidity risk often spikes near expiry or during volatile sessions.

Complexity and mismanagement risk
Spread strategies can be deceptively complex. Misjudging break-even levels, maximum loss, or margin requirements often leads to unexpected outcomes. For instance, traders may underestimate how a widening spread impacts account equity, or forget that margin requirements apply across both legs. A small oversight in structure can turn a controlled-risk trade into a costly lesson.

Spreads vs Other Trading Costs Explained

Spreads are only one part of the trading cost equation. To understand your true break-even point, you need to weigh them against such other expenses as commissions and overnight financing charges (swaps).

Spreads vs. commissions
Some brokers build all their fees into the spread. If EUR/USD shows a 1.5-pip spread, that’s the full cost, no extra commission charged. Others, particularly ECN brokers, quote raw spreads near zero and then add a commission per lot traded (e.g., $7 per round turn on a standard lot). The end cost can be lower than a wide all-in spread, but it depends on your trading style. High-frequency scalpers often benefit from raw spread + commission pricing, while casual traders may prefer the simplicity of all-in spreads.

Spreads vs. swaps (Overnight fees)
Spreads are paid once, at entry. But if you hold trades overnight, you’ll also face swap charges (or rollover fees), the interest rate differential between the two currencies in a FOREX pair. A trade might start with a tight 1-pip spread, but if you hold it for weeks against the swap, those daily charges can outweigh the initial cost. Conversely, in a positive carry trade, swaps can work in your favor, adding income on top of pip gains.

In practice, spreads define the front-end cost of every trade, while commissions and swaps shape the long-term cost structure. Together, they determine how much ground the market has to cover before a position turns profitable. For serious traders, the question isn’t just “what’s the spread?” but rather “what’s my total cost of execution and holding?”

What Are Strategies to Minimize Spread Costs?

There are many ways you can reduce your spread outlay.

Choosing the right broker

Remember, it is the big players, like large financial institutions, that drive the most FOREX volumes, not retail traders, who are but a small part of the ecosystem. Market makers are skilled and experienced at ensuring an orderly flow of buy and sell orders for the currencies in which they work. They have many clients around the globe, and they are skilled at brokering massive transactions.

There is implied risk in this process as prices can change quickly, so market makers must insert a premium that involves elements of their own profit plus a premium for trading risks. In coordination, market makers across the ecosystem help determine the spread equilibrium of global currencies. For you as a retail trader, it helps to understand that your broker procures its FOREX from a market in which market makers influence prices, and this is how you are presented with the spreads you see on your FOREX quote.

Trading the right times

Spreads tighten when liquidity is deepest, which means timing your trades can directly reduce costs. The London–New York overlap is the sweet spot in FOREX: spreads on majors like EUR/USD and GBP/USD can compress to less than 1 pip. By contrast, trading in the late U.S. evening or thin Asian hours (outside yen pairs) usually means wider spreads, making it harder to reach break-even. In short: trade when the world is awake.

Asset selection

Choosing what you trade matters as much as when. Major pairs and high-volume assets, EUR/USD, USD/JPY, S&P 500 indices, or gold, benefit from tight spreads thanks to constant demand and heavy participation. Stray into exotic currencies, small-cap stocks, or illiquid commodities, and spreads widen sharply, sometimes by orders of magnitude. For beginners and short-term traders, sticking with majors isn’t just safer, it’s cheaper.

The importance of using limit orders

Finally, execution method plays a role. Market orders expose you to the worst available spread, especially when liquidity thins or volatility spikes. By contrast, limit orders let you set your price and wait for the market to meet you, reducing slippage and ensuring you don’t pay more than planned. For strategies where every pip counts, using limit orders is one of the simplest ways to control costs.

What are Some Common Mistakes Traders Make With Spreads?

Even seasoned traders can underestimate the role spreads play in their results. A few common errors stand out:

Ignoring spread impact on small trades
New traders often assume spreads don’t matter when working with micro or mini lots. But if you’re chasing 5-10 pips on a micro trade and the spread eats up 2-3 pips, you’ve lost a huge chunk of your profit potential before the market even moves. Spreads scale down in dollar terms with lot size, but they always matter in relative terms.

Trading during news events without adjusting
High-impact announcements can push spreads from 1 pip to 10 pips in seconds. Entering the market without planning for this volatility often leads to blown stops or slippage far worse than expected. Smart traders either widen stops, reduce position sizes, or stay flat during news to avoid these landmines.

Assuming fixed spreads never change
Many brokers advertise “fixed spreads,” but that doesn’t mean spreads are literally locked in under all conditions. In extreme market events, even fixed-spread accounts can experience requotes, widened margins, or execution delays. Treat fixed spreads as more stable, not immune to disruption.

The Bottom Line

When you come to understand spreads, you can improve your trading success because you will learn how to apply them quickly and correctly to trades you are considering. It also helps to know what influences spread so you can visualize your place and your broker’s place in the FOREX ecosystem. 

Spreads are an unavoidable cost in retail trading, but understanding how they work can give you a crucial edge. The tighter the spread, the lower your trading costs, and the quicker you can turn a profit. Choosing the best low-spread broker, trading in liquid markets, and staying aware of spread fluctuations can make all the difference in your bottom line. In the fast-paced world of trading, every pip counts, so make sure spreads work for you, not against you.